Coming soon: the true 'corporate' law firm?

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Published on 11/2/09

The events of the past year have created a general belief that the traditional large law firm model is broken.

The question is how to fix it.

The conventional ideas being talked about, even implemented — alternative fee arrangements, greater use of contract lawyers, off-shoring, fewer equity partners, lower and performance-based associate salaries — are all still within the framework of the traditional law firm. The underlying structure remains the same.

Perhaps one reason for this is that law firms have no accountability outside of themselves. The state bar associations that ostensibly regulate the legal profession are largely oriented to the big firms, as shown by the growing national trend (and most recently implemented by the California state bar and approved by the California Supreme Court) to force mandatory disclosure of the absence of malpractice insurance coverage, a move that is likely to be financially devastating to small and solo firms but have little impact on large corporate ones.

Under the guise of "protecting the public" and "maintaining professional integrity," state bar associations maintain the status quo as they "regulate" marketing, practice admission, specialization and a host of other activities.

Certainly, major firms have a ready model at hand to transform themselves if they want to: their corporate clients. A perfect model of what firms could do, but don't, lies in an alternative method of compensation.

Changing to a cooperative compensation model in which partner income is tied to all the firm's lawyers, working as a team, could address many of the profession's problems. In this corporate model, compensation is paid based on what is generated for the entire organization, not for any one individual. It is no surprise, of course, why virtually no firm has implemented it.

However, the recession may put law firms in the same position as most investment banks nearly 40 years ago: facing a switch from partner ownership to public ownership for financial survival.

In 2007, after a new law was passed that allowed non-attorneys to invest in law firms, the largest class-action firm in Australia launched the first-ever law initial public offering and raised nearly $30 million in equity. In the U.K., the 2007 Legal Services Act, authorizing alternative business structures for solicitor firms, possibly will allow such firms to be listed on the London Stock Exchange or Alternative Investment Market.

The thought of a U.S. law firm taking a similar step may seem remote. Ethical rules such as Model Rule 5.4 prohibit firms from selling equity shares in law firms to non-lawyers by stating that an attorney shall not share legal fees with a non-lawyer.

Also, stock sales might force lawyers to put shareholder interests above duty to clients and create conflicts between the attorney-client privilege and Securities and Exchange Commission disclosure requirements.

But before you say it can't happen, recall the fate of some of the largest law firms and traditional investment banks that ran out of capital during the past year. The demise of these organizations was once as unthinkable as firms being listed on the stock market. But when the model is broken, change is inevitable.

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